China Finance: Could Tencent's Wechat outpace Facebook on mobile?

There's one home-truth about valuing Chinese Internet companies: their market, and potential for growth, is always within China. This is currently being tested by Tencent (HKSE: 0700.HK). If Tencent's Wechat/Weixin - a microblogging and social media service - is able to break through internationally, there could be huge upside for the stock. If it fails, the company's value will remain roughly the same, as the potential isn't currently a meaningful part of the price.

Tencent has used the R&D power of China I discussed last week, and put it to good use creating Wechat/Weixin, which has been referred to as an inverse of Facebook. Whereas Facebook is trying to create a mobile messaging and communication tool from its huge online social network, Tencent started from scratch and created an entirely new mobile messaging and communication offering and is building a social network on top of it.

In a way it's surprising that Tencent isn't already receiving more attention in the international press. It's a hugely important company in the otherwise much talked about China internet sector, and what's more it's market cap is larger than its cousin Facebook's. (Depending on exchange rates, Tencent's market cap is around USD62 billion; Facebook's is currently about USD46 billion.) Yet the lack of an international hit product means most people in the West are still largely oblivious to the existance of this goliath of the Internet. Wechat could change all of that.

Basically this product has everything investors have been calling for from Facebook's mobile efforts, including some very promising revenue-generating prospects. It's already being used by Starbucks for running ads.

Tencent has been on a tear since the lows of early September due to the company's strong position in the China messaging and games market, mainly through its QQ platform. The company has also used some of its cash to create a VC fund, and another chunk went into buying a stake in Caixin, one of China's premier business publications.

200 million users, 8 languages

First some general numbers. The platform currently has 200 million users, up from 100 million just six months ago and is launching internationally towards a few key markets - or perhaps languages would be a better description, as the app is available worldwide. These are: Traditional Chinese (Hong Kong, Taiwan, Singapore etc.), Simplified Chinese (PRC), Russian, English, Thai, Portuguese, Vietnamese, and Indonesian. The real rollout in Indonesia has just started and is a strategically good move as the smartphone market is booming in the country.

While there are plenty of reasons why people might choose to use Wechat internationally, some of these markets might be hampered by the fact that the company is Chinese. Just like Japanese brands are currently having all kinds of trouble in China due to the Diaoyutai dispute, similar disputes could provide resistance towards a Chinese brand.

Will being a Chinese firm hurt Tencent?

For example, China is currently involved in a series of border disputes that could hurt the image of Chinese companies overseas. Vietnam, for instance, is currently in possession of some parts of the South China Sea that China claims is its sovereign territory. The US, too, has proved a tough nut to crack for many Chinese companies as there appears to be a certain stigma attached to their names.

On top of this you have to account for the fact that much of the text and images users transmit on Wechat may be stored on servers in mainland China, in which case they would be under the jurisdiction of the Chinese authorities and information from them would likely be available for scrutiny. While this isn't a problem for users who live in mainland China anyway, overseas markets might take another view of the matter.

Nevertheless, even if we exclude these markets where the company's nationality is likely to cause the most trouble, we are left with some very attractive growth opportunities in Russia and emerging markets in southeast Asia, where the fact that the company isn't American may be an advantage. It's important to note that in many of these markets internet expansion is dominated by smartphones, which means that the best smartphone solution has a competitive advantage over ther best overall solution.

Praised in Asian tech press

Overall Tencent appears to have chosen its expansion plans wisely, and is moving with intent to make an impact in these markets. They have a solution that is being praised in Asian tech press and beyond, and they have plenty of cash to back up their push. There are reasons why they could fail, but even if the international push doesn't go to plan you're left with China's biggest internet company and a mobile app in China that is quickly moving to rival Sina's Weibo in popularity. It looks like a lot of upside with very little downside to go with it.

----------

I write regularly about Chinese equities, mainly those listed on foreign exchanges. If you'd like to comment on this story or be notified by email whenever a new China Finance story is published, become a member - it's free, and you can use your Twitter, Facebook, Google or LinkedIn login - and "follow" the China Finance blog during the signup process. You can also bookmark the China Finance blog page.